Friday, February 24, 2012

More BP

We have posted numerous times on the travails of BP following the Deepwater Horizon disaster and the contribution of safety culture to these performance results.  BP is back in the news since the trial date for a variety of suits and countersuits is coming up shortly.  We thought we would take the opportunity for a quick update.

The good news is the absence of any more significant events at BP facilities.  In its presentation to investors on 4Q11 and 2012 Strategy, BP highlighted its 10 point moving forward plan, including at the top of the list, “relentless focus on safety and managing risk”.* 

It is impossible for us to assess how substantive and effective this focus has been or will be, but we’ve now heard from BP’s Board member Frank Bowman.  Bowman is head of the Board’s Safety, Ethics and Environment Assurance Committee.  He served on the panel that investigated BP’s US refineries after the Texas City explosion in 2005 and then became a member of BP’s US advisory council; and in November 2010, he joined the main board as a non-executive director.  Basically Bowman’s mission is to help transfer his U.S. nuclear navy safety philosophy to BP’s energy business.

Bowman reports that he has been impressed by the way the safety and operational risk and upstream organizations have taken decisions to suspend operations when necessary. “We’ve recently walked away from several jobs where our standards were not being met by our partners or a contractor. That sends a message heard around the world, and we should continue to do that.”**

Looking for more specifics in the 4Q11 investor presentation, we came across the following “safety performance record”. (BP 4Q11, p. 12)

The charts plot “loss of containment” issues (these are basically releases of hydrocarbons) and personnel injury frequency.  The presentation notes that “Aside from the exceptional activities of the Deepwater Horizon response, steady progress has been made over the last decade.”  Perhaps but we are skeptical that these data are useful for measuring progress in the area of safety culture and management.  For one they both show positive trends over a time period where BP had two major disasters - the Texas City oil refinery fire in 2005 and Deepwater Horizon in 2010.  At a minimum these charts confirm that the tracked parameters do nothing to proactively predict safety health.  As Mr. Bowman notes, “Culture is set by the collective behaviour of an organisation’s leaders… The collective behaviour of BP’s leaders must consistently endorse safety as central to our very being.” (BP Magazine, p. 10)

On the subject of management behavior, the investigations and analyses of Deepwater Horizon consistently noted the contribution of business pressures and competing priorities that lead to poor decisions.  In our September 30, 2010 blog post we included a quote from the then-new BP CEO:

“Mr. Dudley said he also plans a review of how BP creates incentives for business performance, to find out how it can encourage staff to improve safety and risk management.”

The 4Q11 presentation and Mr. Bowman’s interview are noticeably silent on this subject.  The best we could come up with was the following rather cryptic statement in the 4Q11: “We’ve also evolved our approach to performance management and reward, requiring employees to set personal priorities for safety and risk management, focus more on the long term and working as one team.” (BP 4Q11, p. 15)  We’re not sure how “personal priorities” relate to the compensation incentives which were the real focus of the concerns expressed in the accident investigations.

Looking a bit further we uncovered the following in a statement by the chairwoman of BP’s Board Remuneration Committee: “For 2011 the overall policy for executive directors [compensation] will remain largely unchanged…”***  If you guessed that incentives would be based only on meeting business results, you would be right.

In closing we leave with one other comment from Mr. Bowman, one that we think has great salience in the instant situation of BP and for other high risk industries including nuclear generation: “In any business dealing with an unforgiving environment, complacency is your worst enemy. You have to be very careful about what conclusion to draw from the absence of an accident.” (BP Magazine, p. 9) [emphasis added]

BP 4Q11 & 2012 Strategy presentation, p. 8.

**  BP Magazine, Issue 4 2011, p. 9.

***  Letter from the chairman of the remuneration committee (Mar. 2, 2011).

1 comment:

  1. Certainly there is good reason to view BP reports of a turn-around in protection effectiveness with a critical eye. Still it takes a long time to transform a performance culture that risk-reckons too mindlessly - trends are important indicators of seriousness.

    In your report there is one statement attributed to Admiral Bowman: “We’ve recently walked away from several jobs where our standards were not being met by our partners or a contractor. That sends a message heard around the world, and we should continue to do that.”

    Certainly had this been a norm across the organization before Deepwater Horizon, the odds of that Black Swan would have been substantially reduced. Three field-experienced executives (2 BP) on the platform the morning of the disaster missed an opportunity to insert a "safety pause" - those guys should be on the management circuit around the company telling the story of how things must go differently in the future. (I've no idea if they are)

    As regard the coupling of management incentives to protection performance I suggest the appropriate metric is right in front of us. Those fugitive emission events (loss of containment) have been reduced by 50% in 4 years.

    My intuition would be that a target in the 10 per year range is achievable and incentivizing executives to get there (and dis-incentivizing them for not making progress in their portfolios) is a very workable indicator of risk-balancing priorities.

    The prospect of another $30B loss should be able to buy a lot of experience transfer from organizations like Naval Reactors, NASA, and INPO who've been down this long-term improvement path ahead of BP.

    Do they want it bad enough? We'll see.


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